Non-Competes in the Sale of a Businesses

When a business is sold, the buyer expects that they will have the benefit of their bargain.  They do not want the seller to be able to set up another identical business next-door.

Nebraska courts are traditionally very hesitant to enforce non-compete agreements, especially for employees who leave a company.  Individuals are entitled to make a living.  And, restrictions cannot be found to violate public policy.  However, courts are more likely to enforce restrictions in the sale of a business if the restriction meets the following requirements:

• Facts. Partial restraints on a seller of a business are not unreasonable if they are ancillary to a purchase of property made in good faith and are necessary to afford protection to the purchaser. What is a reasonable restraint depends largely upon the facts of the particular case.
• Limited Time. Restraints on the seller’s ability to compete must be limited in time.  Nebraska courts have upheld restraints of five years Presto-X-Company v. Beller, 253 Neb. 55 (1997).  Two years is a very common timeframe.
• Limited Space. The restriction on the seller’s ability to open a similar business must be limited to a geographic area that is necessary to protect the value of the asset.  at 64.
• Client Contact. Some restraints apply only to clients or customers.  Specific customers can be identified in a purchase agreement.  Or, the agreement could simply note that the seller cannot contact any current or former clients.  Nebraska courts have held that when a “customer list” was specifically included in the assets being sold, the covenant not to compete was a reasonable method of protecting the property acquired by the purchaser. Chambers-Dobson, Inc. v. Squier, 238 Neb. 748, 761-762 (1991).

Sometimes clients are willing to sign a non-compete agreement that goes beyond what courts would enforce.  This is a concerning situation, because even though courts would strike the provision down, it can still be quite expensive to reach the point in litigation in which a judge makes that decision.

Angela Madathil is a Business, M&A, and Deal Attorney and provides legal assistance to shareholders, buyers and sellers of businesses, as well as business brokers in Nebraska, Missouri, and Kansas.   This can involve reviewing loan commitments, loan documents, general contract review and negotiation, due diligence assistance, and post-sale integration.  The Goosmann Law Firm team advises to buyers and sellers of businesses, as well as business brokers throughout the Midwest and has attorneys licensed in Iowa, Kansas, Minnesota, Missouri, Nebraska, South Dakota, and other states.